What is tax sovereignty for?

The sovereign state is perhaps the single most important structural phenomenon in human organisation today, and tax sovereignty is one of the fundamental components of the sovereign state. But what is tax sovereignty for?

On 25 April 2017 the SMART project’s tax cluster and a number of scholars from around the world met to discuss taxation and sustainable development.

One thing that became particularly clear over the course of the day was the interconnectedness of the topics. Practical questions about how revenue can be raised for sustainable development or how taxes can suppress behaviours that have an adverse impact on sustainable development could not be fully or conclusively addressed because of underlying systemic issues raised as theoretical issues at other points in the day.

For example, one of the questions regarding environmental taxes was to do with the position on the value chain on which they are best imposed – upstream, midstream or downstream.

David Quentin. Photo: Jukka Mähönen.

No doubt there would be an optimal answer to a question like this, depending on the specifics of the commodity or value chain in question, proceeding on the assumption that the entire chain is in one jurisdiction. But in reality the chain could pass through any number of jurisdictions. And for each jurisdiction through which it passes, the far more significant question than the environmental one is the question of how such a tax would impact on the positioning of its firms within the chain, and on its fiscal mix from the point of view of balancing revenue raising, environmental impact, and investment. It follows that the tax in question, insofar as it is optimised for improved environmental outcomes globally, is a pipe-dream.

Similarly, when it comes to improving fiscal outcomes in low-income countries – an absolutely core requirement of sustainable development – the pressure which jurisdictions feel to compete with each other as regards their tax offering to globalised capital seems to amount to a structural barrier, blocking all the obvious routes to significant progress.

It is for this reason that Jussi Jaakkola’s paper provided the central theoretical mass around which the other topics addressed over the course of the day seemed to orbit. His paper anatomised the pathological incongruity of the concept of 'tax sovereignty' in today's economically interdependent world. The sovereign state is perhaps the single most important structural phenomenon in human organisation today, and tax sovereignty is one of the fundamental components of the sovereign state. But what is tax sovereignty for?

Tax sovereignty may be characterised as a state's autonomous power to positively levy taxes, and as such one can see why states are keen to retain it. But in practice that is not where tax sovereignty finds itself being contested today. Most often tax sovereignty is about the state's power to not tax, and in particular the state's power to relieve global capital of the burden of taxation in order to induce it to reallocate itself geographically.

Perhaps the starkest illustration of this is Ireland's struggle against the European Commission to preserve the tax advantages it granted to Google. But the dynamic is systemic: states are willing to co-operate over taxes in any number of ways, and even to submit to supranational sovereignty over the definition of the tax base when it comes to taxes on consumption, but their power to lower the rates or narrow the bases of taxes on capital, and in particular their power to give away to companies what would otherwise be public money, seems to be the very last thing they would ever relinquish.

Clearly, however, relinquishing that power would be the first step towards effective fiscal solutions to the problems we face when we view ourselves as inhabitants of the world rather than as inhabitants of various countries. It is very hard to persuade oneself that the problems we face as inhabitants of the world – permanent environmental destruction; levels of inequality that defy the powers of the human imagination to conceptualise – are the less important of the two categories.

It is for this reason that the sustainable development lens is such an important and challenging lens through which to view tax issues. Seemingly unassailable ideological positions such as those underpinning the concept of tax sovereignty, positions which are foundational to most discussion of tax, are shown to be as temporary as, and more harmful than, the ideologies which underpinned previous failed modes of human organization. And what those positions appear to be doing now is leading us into global adversity on an unprecedented scale.

SMART has received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement No 693642. The contents of this website are the sole responsibility of the SMART project and do not necessarily reflect the views of the European Union.